Ogden rates

[mario]

Do Ogden rates apply to all BI claims in the UK or just those which are large enough to go to court?

I assume the tables are used as a reference for all claims (of sufficient size), when insurers negotiate claim settlements. However, do they only have force of law if a court ruling is required in respect of a claim? (That is, an insured is able to negotiate anything they want with the insurer?)

So if there is an Ogden rate change, it'll apply to all BI claims, and for attritional claims you'd have to make some sort of assumption about salary, age and gender mix to assess the impact of the changes? (I know the newest change proposed is a change in discount rate but just wanted to check I've understood this properly)

Thanks!

 

[Coralie Clarke]

Hi,

PPOs (Periodic Payment Orders), to which the Ogden tables relate, are awarded by courts, so these tables would only be used by claims that go to court. [Because of the potential extra cost and uncertainty attached to the claim amounts when PPOs are used, I think it would be unlikely that any insurer would choose to use this approach for non-court claims when negotiating amounts with an insured.]

Coralie

 

[langbourner]

Ogden tables were around way before PPOs came into existence. Since the 90s they have always been used as a reference for lump sum BI claims where the injury is likely to have a material medium-to-long term effect (i.e. where mortality and/or the time value of money come into play)

Even if a claim doesn't go to court, lawyers will use Ogden tables as a reference. They will obviously try to determine what a court would award as part of a negotiation. If an insurer offers materially below what a court would award, the claimant will just go to court.

One interesting aspect of Ogden discount rate changes is that they apply to claims that have not settled, even if the loss happened ages ago.

The last time I checked, insurers generally, but not always, preferred to settle lump sum. This is understandable as it's difficult to hedge/lay off longevity risk for impaired lives and, in any case, general insurers don't specialise in long tail risks. Some insurers prefer to settle PPO. Why? I don't know. Perhaps because other parts of their group sell long-tail business or hold long-tail assets? Reinsurers tend to dislike PPOs because of the way they interact badly with indexation clauses. They are very capital hungry. The UK reinsurance market also lacks a standard commutation clause (c.f. France). This feeds through to reinsurance rates and affects insurers' appetites accordingly.

Judges generally prefer PPOs, as they better match claimants' liabilities.

You'd think claimants would always prefer PPOs, but often they don't. Perhaps because they don't understand the time value of money and they like the idea of a mega-windfall.

Most PPO settlements also include a lump sum element (which may depend on the Ogden tables, but could just be for up-front costs like reengineering the claimaint's house to fit a wheelchair).

Hope that makes things a little clearer. Could have gone into lots more detail - the above is a bit simplistic, but hopefully gives you the gist.

 

[langbourner]

Now will someone answer my question on the specimen SA3 paper?!

 

[td290]

On reason why an insurer might propose settling with a PPO rather than a lump sum is if there is a disagreement regarding life expectancy that is causing the lump sum to be set very high in comparison with the likely ultimate cost of a PPO.

 

[langbourner]

That's a good point thanks.